JUNE 14, 2021
By: Bill Mitchell, Licensed Insurance Agent since 1985
CONSTRUCTION COSTS SPIKE
Over the last few months, we’ve seen construction costs on the rise. Some of the factors causing this increase are historically low interest rates, which is causing bidding wars and driving prices up; limited inventory drives lumber and material prices up, caused by a slowdown in production during Covid. When we have a short supply of anything combined with high demand … prices go up; increased payroll costs due to labor shortages; and delays and longer timelines to complete jobs.
All of these issues and more have caused construction costs to spike!
Understanding Different Ways Your Home or Commercial Property is Valued
Market/Appraised Value is typically what your home or property would sell for on the open market. A realtor or appraiser would do an analysis of your home, land, and overall property compared to others that have sold in your area and then make adjustments based on your home’s unique features. At the end of this process, the appraiser or realtor will give you their opinion of the market/appraised value of your home or property. There are many non-construction considerations in determining market/appraised value including the size of your lot, what’s around you, location, water frontage, town/city zoning of your property, to mention a few. None of those considerations impact construction costs.
Assessed Value is the amount your town or city values your home for real estate tax purposes. The formula may differ from one municipality to another so there is not a standardized approach when calculating Assessed Value. Assessed value has no impact on construction costs, it’s simply a valuation used for calculating real estate tax purposes.
When it comes to insuring your home, Market/Appraised Value and Assessed Value are irrelevant. Insurance companies base the settlement of your claim on your home or building’s Construction/Replacement Cost … what it will cost to re-build your home or building using modern day materials and building codes, and current labor costs. Other factors when determining how much insurance to carry include demolishing what’s left of your destroyed property, hauling off and disposing of the debris, rebuilding your home or building to current building codes and local municipality ordinances, and utility service lines.
Don’t let Market Value or Assessed Value confuse you with what really matters when it comes to your home or building insurance. It’s all about construction costs and replacement cost of your home or building, which is likely $200+/sf range nowadays depending upon features, finishes, and many other considerations of your property. Each house or building is different so it is important to do your own unique calculation.
Insurance to Value (ITV)
Most, if not all, home and commercial property insurance policies require you to purchase at least 80% of your property’s replacement cost to avoid penalties at the time of a covered claim. Here are a couple examples:
Total Fire Loss - If your property costs $300,000 to rebuild and you carry $200,000 you’re going to get $200,000 (at the most) to rebuild your home or commercial property.
Partial Fire Loss – If your property costs $300,000 to rebuild and you carry $200,000 you’re going to get roughly 83% of the damage. So, if your kitchen is destroyed in a fire and the cost to repair the damage is $100,000 you’re going to get approximately $83,000. This is the penalty for insuring your home or commercial building under the 80% requirement.
Getting ITV right is critical to avoid penalties should you suffer a covered claim.
Please note that these scenarios are hypothetical. It is critical that you speak with a knowledgeable agent who will help you identify your unique exposures and help you make well informed decisions about what coverages and limits are right for you.
What Should You Do?
Start by CLICKING HERE to get a free construction cost estimator. Answer a few simple questions and a licensed insurance agent will do the rest.
Another good option is to speak with a contractor and ask him or her for their opinion what it would cost to build your home or building if it were destroyed by a fire or other covered claim.
Don’t put this off! If I were a betting man, I’d bet most people are currently underinsured and would suffer penalties and financial losses if their home or commercial building was destroyed by a fire or other covered claims.
Call GHM today at 1-800-244-9046 to speak with one of our friendly, knowledgeable agents who can help you decide how much coverage is right for you.
51 Main Street
Waterville, Maine 04901
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